The Japan Tobacco Group has announced a new operating model to further strengthen the competitiveness and profitability of its tobacco business. The changes include the consolidation of the company’s current international and Japanese-domestic tobacco businesses into one tobacco business, as well as the optimization of its operations in the Japanese market.
The headquarters of the tobacco business, including the Japan market, which is currently managed from Tokyo, will be consolidated into the existing headquarters of the international business in Geneva.
“Over the years, the JT Group has consistently anticipated new challenges and managed to successfully transform itself during rapidly changing business environments,” said JT Group President and CEO, Masamichi Terabatake in a statement. “We achieved this through large-scale transformative acquisitions, such as RJRI and Gallaher, and geographical expansions into emerging markets. In parallel, we continuously enhanced our portfolio’s brand equity with a focus on global flagship brands and invested in reduced-risk products [RRP] to expand sales.
“Since I assumed office as the CEO of the group, we have made progress in several areas to strengthen our global competitiveness and business foundation, including the formation of global teams for our R&D and RRP functions as well as transforming the operating and organizational structures in the international tobacco business.
“Today’s announcement is an acceleration of our transformation and will elevate the JT Group to the next level. We are consolidating the organizations of the international and Japanese-domestic tobacco businesses to enable us to fully leverage our company-wide resources and clearly prioritize business investments globally. I am confident that this organizational structure will efficiently and effectively deliver products and services, exceeding consumer expectations. We believe this new model is essential to strengthen our worldwide competitiveness, especially in the RRP category, enabling us to deliver sustainable profit growth in the mid- to long-term.
“The RRP category in Japan is the most mature and competitive in the world, so maximizing the value offered to our consumers by strengthening our competitiveness is a clear priority. In reflection to this and the decline of the sales volume in recent years as well as a highly uncertain operating environment, we had to take some difficult yet necessary decisions,” said Terabatake.
According to the JT Group, rapid changes in the tobacco industry include perception of smoking and health, heightened tobacco regulations and tax reforms in various countries, increasingly diverse consumer preferences and expansion as well as intense competition in product development in the RRP category.
Having closely reviewed the business environment from a long-term perspective, the JT Group concluded that a revision of its strategic focus in its tobacco business is necessary. The group’s objective going forward is to operate with a stronger consumer-centric mindset and prioritize investments in heated tobacco sticks in the RRP category while maintaining necessary investments towards combustible products. The combination of the two tobacco businesses will enable efficient and effective deployment of resources within the group.
More details of the group’s planned restructuring are available here.
The JT Group reported an operating profit of ¥469.1 billion ($4.48 billion) on revenue of ¥2.09 trillion in fiscal year 2020, down 6.6. percent and 3.8 percent, respectively, from 2019. Adjusted operating profit declined 5.6 percent to ¥487 billion. At constant currency exchange rates, adjusted operating profit was up 5.5 percent to ¥544.5 billion.
The company’s international tobacco business sold 435.7 billion units in 2020, 2.3 percent less than in 2019. Volume sales in Japan declined 8.2 percent to 114.9 billion units. The company reduced-risk product sales volume increased by 0.7 billion units year on year to 3.9 billion. Its market share in the RRP category is estimated at approximately 10 percent on an offtake basis.
“Despite the challenges impacting our operations, including Covid-19, the JT Group delivered a solid business performance in 2020, driven by the relentless efforts and passion of our employees worldwide,” said Terabatake. “During this period, we grew share in most of our key markets and captured pricing opportunities. I am also pleased to report that the JT Group continued its investments to strengthen our RRP business with the introduction of Ploom S internationally and Ploom S 2.0 in Japan.
“We will further build on our solid momentum, by adopting a more focused prioritization of our investments towards heated tobacco sticks and combustibles. While we expect the operating environment in 2021 to remain highly uncertain, we expect to continue gaining market share globally both in combustibles and in RRP. Notably, our next generation device for heated tobacco sticks will be launched in Japan early in the second half of this year, followed by launches in Russia and other international markets.”